Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 60-79)

MR LEN COOK, MR JOHN PULLINGER AND MR ROBIN LYNCH

WEDNESDAY 30 OCTOBER 2002

Mr Beard

  60. Your argument as I understand it is that the Comptroller and Auditor General has a different role and therefore he is compiling the data in a way that suits his role and you have got to compile the data in a way that suits your role, which I understand. Can you just for clarification say what is the difference between the two roles that you perceive?
  (Mr Lynch) The difference in the two roles is that it is our duty to present the picture of the economy with the units in that economy classified according to the rules of national accounts according to a picture of the whole economy that makes sense to the economists and the policy makers and that is articulated in a coherent manner. That is the game that we are in. Therefore, we have to show, for example, that for every transaction there is a party and a counter party. You may record things, for example, once in our set of accounts. I am now jumping over the fence to try and explain what business accountants do. They present the accounts to show a true and fair value of the financial accounts of units. The reason they do this is to let people make a judgment as to whether they are financially solvent and how they are likely to be in the future. They can therefore come to a different conclusion on the same facts. For example, in Network Rail there is one director that belongs to the SRA. He is appointed by the SRA; he cannot be dismissed. The SRA has one director that is always there. They see that as symptomatic of a parent/subsidiary relationship. In the financial sense they believe that he will have an influence on the financial affairs of that company. According to our rules he is one member out of 12 and he can be overruled by the majority of private sector members—same facts; different view for a different purpose.

  61. So that explains why, Mr Cook, you and the Comptroller and Auditor General can come together and say, "We are both consistent but we are doing different jobs"? That is essentially what your note is saying?
  (Mr Cook) Yes, very much so.

Chairman

  62. But what I still do not quite get is that you seem to regard your job as ensuring that the rules were followed. You ring up the head of accountancy at the Department of Transport, who have a huge interest in keeping this thing off the Government balance sheet, and say, "Did you follow the rules?", and he rings you back and says, "Yes, I followed the rules", and you say, "That is okay". Surely the issue for us is whether the rules make sense? Why are you not satisfying yourself that these rules actually make sense as to where the contingent liability lies?
  (Mr Lynch) The head of the accountancy profession at the Department of Transport is a professional accountant whose actions are audited by the National Audit Office.

  63. But he is working for the Government. You are supposed to be representing the public interest here, are you not?
  (Mr Lynch) I am telling you I cannot say how he acted. I am saying he is a professional accountant and we asked him in his capacity as a professional accountant. I am a professional statistician.

  64. He is working for the department which has an interest in the outcome, in the classification.
  (Mr Lynch) Yes.

  65. This is an enormously important question, not just for the Department of Transport but for the Treasury and the Government.
  (Mr Lynch) That is why it is important that the National Audit Office, whose job is to stand outside all of this and to see whether people are drawing true and fair accounts, have observed that classification.

  66. They have taken a different view from you.
  (Mr Lynch) No, sorry. The National Audit Office have also said that it is a contingent liability. It is in the joint statement.

Mr Beard

  67. But surely the National Audit Office has said, "If I were in your shoes doing your job I would do it your way"?
  (Mr Lynch) In so far as they are competent to make that statement, yes, that is correct.

Dr Palmer

  68. If I understand the difficulty, if you like, it is that it is not that there is a row going on between you and the National Audit Office over whether it is a contingent liability. You agree that it is a contingent liability. The question is (which the Chairman has raised) should contingent liabilities be treated as they up to now have been in the national accounts, and you are saying, if I understand you correctly, that this follows the international accounting practice. Is that right?
  (Mr Lynch) Yes.

  69. You do see our difficulty, that if the Government had a 99 per cent probability of incurring some enormous cost, that would still be a contingent liability but we would be reasonably concerned. If it has a one per cent probability we would probably say, "Oh, well, . . .". You are saying that the national accounts would treat them both in the same way?
  (Mr Cook) I think a huge part of the confidence that people expect to have in the work of my Office is based on its conformance to standards and practices, either standards that we have developed locally or international standards. In this case one of the really difficult issues that we have is the capacity to explain intuitively what we have done and why that differs from commercial accounting practice, and I think the sheer hugeness of the decision and the intuitive difficulty in that in explaining why something which government ultimately has accepted a residual contingent interest in is not in the public sector is something that has been difficult to present and explain.

Mr Cousins

  70. I am trying to follow the logic of this. Who appointed the other 11 members of the board of Network Rail?
  (Mr Lynch) They were appointed by a selection panel which was chosen by— when you establish these things you create a circle. First of all, the Government started all this off and they created a selection panel which then selected directors and members.

  71. The Government appointed a selection panel?
  (Mr Lynch) That is correct.

  72. The selection panel then appointed the other 11 members?
  (Mr Lynch) The directors of the board.

  73. If the other 11 members they had appointed—the selection panel, that is,—had happened to be, I do not know, consultants in St Thomas's Hospital over the road, would Network Rail have been in the public sector or the private sector?
  (Mr Lynch) I think the choice was made of people from the private sector.

  74. No; that was not the question I asked you. The question I asked you was, if the selection panel had happened to appoint 11 consultants from St Thomas's Hospital, who are employees of the NHS, would that have transferred Network Rail from the private sector to the public sector?
  (Mr Lynch) In the sense that they are member of the public sector, yes, it would.

  75. So what made Network Rail private sector? Was it the employment of the people who had been appointed to the board?
  (Mr Lynch) What makes them private is the membership, and the membership are responsible for appointing the directors.

  76. Do forgive me. This is quite intricate and I am having difficulty with this. You have told me quite clearly that the reason Network Rail is in the private sector is that the people whom the selection panel appointed happen to be employed by the private sector, but if they had happened to pick 11 consultants from St Thomas's Hospital instead of 11 whoever they might have been, then it would have been in the public sector because the people would have been employed by the public sector?
  (Mr Lynch) That is correct.

Mr Beard

  77. Could I take up the case of the Department of Transport accountant whom you put this issue to, where the Chairman's observation was that he is an employee of the Government and so he is not an independent party? There are many cases where professionals within government are held responsible for their professional judgment rather than their accountability to the political head. Have you ever in your experience come across an instance where you referred to an official in a professional capacity and you had suspicions that he was not giving you information in a professional capacity but giving you tainted information with a political bias?
  (Mr Lynch) All I can say is that I have no reason to believe that the Department of Transport official did anything except act in his professional capacity as verified by the National Audit Office whose job it is to check out that they are acting to the highest standards of their profession.

  78. But is it your experience in the National Statistics office, because you must have to contact people all the time to get opinions, that you are happy with this as a means of getting professional advice, or do you have a feeling on many occasions that you are not?
  (Mr Lynch) In my experience I get good professional advice from professionals that act to the highest standards of their profession. That is my personal experience.

  79. Is that your experience too, Mr Cook?
  (Mr Cook) I believe so, yes. Can I say that in the case of the transport accountant's advice I decided that it would be necessary to have the Comptroller and Auditor General's opinion before we moved on that as part of the protection for that person as well.


 
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